An NFT is a non-fungible token, meaning it is unique, and cannot be replaced with something else. NFTs can be anything in digital form, be this a piece of art, music, videos, trading cards, virtual worlds, collectibles, etc. Christies was the first major aution house to offer a purely digital work with a unique NFT. Notably, New York Times reports that this digital collage comprised of Beeple’s first 5000 days of work sold for over US$69 million in March 2021.
How are NFTs created?
An NFT is created via a process called minting which entails the NFT’s information being recorded on the blockchain. The 3 keys steps involved are as follows:
- A new block is created
- NFT information is validated by a validator
- The block is closed
A unique identifier is assigned to each minted token which is linked to one blockchain address. There is an owner for every token whose ownership data is publicly accessible. Regardless of the number of NFTs minted, each token is individually distinguishable because of its specific indentifier.
The Bored Ape Yacht Club
Probably one of the most prominent NFT stories is that related to the Bored Ape Yacht Club, a collection of 10,000 unique Bored Ape NFTs (unique digital collectibles) residing on the Ethereum blockchain. It features profile pictures of cartoon apes that are reportedly procedurally generated by an algorithm. Bored Ape NFT owners are said to be given access to a private online club, exclusive in-person events and intellectual property rights for the image. The parent company of the Bored Ape Yacht Club is Yuga Labs which, according to a 2022 Reuters article was valued at US$4 billion after a $450 million funding round led by a16z crypto, Andreessen Horowitz's crypto fund.
NFT performance in 2023
In an August 2023 article by Coindesk, sales of NFTs are said to have dropped by 49% from US$7.36 million in January to US$3.7 million in July 2023. In terms of trading, January saw $1.1 billion in trading volume while July had just $600 million.
NFTs and the forex market
NFTs have the potential to disrupt the forex space, particularly if NFT trading via Contracts for Difference (CFDs) becomes possible at some point in the future. The appeal lies in the ability the trader will have to speculate on the direction the price of a specific NFT piece (the underlying asset) will take, profiting from a potential increase or decrease in value, without the need for ownership.
However, trading of NFTs in this way does raise key challenges, namely regulatory, liquidity, risk management and the need for education. Let’s take a closer look at these factors.
- The need for liquidity: Adequate liquidity in the NFT market is required for increased integration of NFTs into CFD trading. However, given that NFT markets are still in their infancy, liquidity constraints may exist for certain assets. However, with continuous growth of the NFT space, improved liquidity is anticipated, rendering NFTs more compatible with CFD trading.
- Jurisdictional regulations: Each jurisdiction has its own regulatory infrastructure in regards to NFTs and CFDs so as to safeguard investor funds, mitigate against market fraud, and ensure transparency.
- Managing risk: Both NFTs and CFDs come with high volatility so having a proper risk management plan in place is crucial. This includes measures like stop loss and take profit orders. In fact, CFDs are also highly leveraged, adding an additional layer of risk. This is because while leverage may enable a trader to handle larger positions and maximise potential profits, it can also expose them to large, unexpected losses.
- Getting a trading education: Understanding the opportunities that may arise from trading NFTs via Contracts for Difference requires knowledge, skill and experience. To acquire either of these requires engaging in some learning. This can come in many forms as a vast variety of educational resources exist online in which to gain a trading education. This includes blogs, videos, seminars, webinars, podcasts, and many more.
Why traders would choose to trade CFDs on NFTs?
As of now this trading NFTs via CFDs is not yet offered by brokers, however the synergy between these two instruments could open up new posibilities in the future of digital economy. There are many reasons a trader may choose to take up CFD trading with IronFx. Let’s explore some of these:
- CFD trading may provide a means to access the NFT market, allowing all types of traders, regardless of experience or budget, to attempt to profit from these unique digital assets without having to directly own them.
- CFD trading on NFTs may offer a trader a way to diversify their trading portfolio, unlocking new avenues for potential profit and helping mitigate risk.
- CFDs offer a higher level of liquidity and leverage.
- CFDs can be used for hedging purposes.
- The CFD market is usually accessible 24/5 making it more convenient for traders across the globe to engage in trading.
- CFD trading will allow you to profit from both rising and falling NFT prices. Traders can go long when prices are expected to rise and go short in anticipation of prices falling.
